Answer the questions on the basis of the information given below.
Company X
TOTAL FUND USED = 30 LAKHS
| Face value of share |
₹10/- |
| Interest rate on Debt | 10% |
| Tax rate | 30% |
| EBIT | 4 Lakhs |
| Situation I (Debt) | Nil |
| Situation II (Debt) | 10 Lakhs |
Choose the correct answer from the options given below:
The Earning After Tax (EAT) for situation II is:
Answer & explanation
Correct answer: option 3
The correct answer is option 3- ₹2,10,000.
Debt = 10 lakhs
Interest = 10%
Interest amount = 10,00,000 x 10/100
= 1,00,000
EBIT = 4,00,000
less: Interest = 1,00,000
EBT = 3,00,000 (Earnings before taxes)
less: Tax = 90,000 (3,00,000 x 30/100)
EAT 2,10,000
Thus, EAT for situation II is 2,10,000.